Capital Allocation Trends At Riyal Investment and Development (TADAWUL:9584) Aren't Ideal

If we want to find a stock that could multiply over the long term, what are the underlying trends we should look for? Ideally, a business will show two trends; firstly a growing return on capital employed (ROCE) and secondly, an increasing amount of capital employed. This shows us that it's a compounding machine, able to continually reinvest its earnings back into the business and generate higher returns. Although, when we looked at Riyal Investment and Development (TADAWUL:9584), it didn't seem to tick all of these boxes.

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Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Riyal Investment and Development:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.12 = ر.س30m ÷ (ر.س339m - ر.س89m) (Based on the trailing twelve months to June 2024).

So, Riyal Investment and Development has an ROCE of 12%. In absolute terms, that's a satisfactory return, but compared to the Transportation industry average of 7.2% it's much better.

View our latest analysis for Riyal Investment and Development

Historical performance is a great place to start when researching a stock so above you can see the gauge for Riyal Investment and Development's ROCE against it's prior returns. If you're interested in investigating Riyal Investment and Development's past further, check out this free graph covering Riyal Investment and Development's past earnings, revenue and cash flow .

The Trend Of ROCE

When we looked at the ROCE trend at Riyal Investment and Development, we didn't gain much confidence. To be more specific, ROCE has fallen from 15% over the last two years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. This could mean that the business is losing its competitive advantage or market share, because while more money is being put into ventures, it's actually producing a lower return - "less bang for their buck" per se.

The Bottom Line On Riyal Investment and Development's ROCE

From the above analysis, we find it rather worrisome that returns on capital and sales for Riyal Investment and Development have fallen, meanwhile the business is employing more capital than it was two years ago. And long term shareholders have watched their investments stay flat over the last year. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

If you want to know some of the risks facing Riyal Investment and Development we've found 4 warning signs (1 is significant!) that you should be aware of before investing here.

While Riyal Investment and Development isn't earning the highest return, check out this free list of companies that are earning high returns on equity with solid balance sheets.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.